Treasury goes international:

Internationalization, which can significantly increase growth potential, is a strategic decision for companies, whether they are small or medium-sized enterprises (SMEs) or large corporations. It usually involves various stages of globalization, each of which places different demands on resources and management. Exporting is the first step, in which products or services are sold abroad. Progressive internationalization efforts can then lead to establishing a foreign branch or a production facility, for example. The highest degree of internationalization is the establishment of subsidiaries as separate legal entities abroad, making full integration into new markets possible. 

While most treasury activities in the preliminary stages of internationalization can be managed by the central treasury department, establishing a foreign subsidiary is the starting point for expanding the treasury function on an international scale. The treasury department now has to demonstrate its expertise in an international context and may even have to set up treasury structures abroad. In doing so, the internationalization of the Treasury should be treated as the strategic necessity it is. Treasury is key to ensuring the company's financial stability and liquidity as well as risk management in what is often a volatile international environment. By managing and securing international financial flows, the treasury department is instrumental in the success of global expansion and ensures the company's long-term competitiveness.

Once the need for the treasury department to have an international focus has been recognized and the fundamental goal has been set, companies are faced with the next major challenge: how to operationalize the project. The tasks to be tackled in the context of internationalization are highly complex and usually have far-reaching implications in terms of organization, finance and personnel. This is why a strategic, structured framework for action is crucial for a successful project. The first step is to shift the focus away from the numerous detailed issues towards a higher level. 

From this overarching perspective, you can then identify key areas for action and assign specific goals, work packages and timetables to them. A number of fields of action are an essential part of almost all internationalization efforts of treasury departments. These are:

• Organizational structure
• Processes 
• Treasury IT
• Regulation and governance
• The human factor

The following outlines of these areas of activity only provide a first impression and do not do justice to the complexity of the individual topics. The other articles in the “Treasury goes international” series will tackle these areas of activity and explore them in greater detail. 

Orienting the treasury department to an international focus begins with examining its basic structure. As already discussed in detail in edition 128 of the KPMG Corporate Treasury Newsletter (December 2022), various aspects need to be considered when designing the treasury organization. This may seem trivial at first, but it becomes a challenge in an international context - especially when it comes to making a decision between centralizing or decentralizing the treasury function.

At the heart of the matter is the question of whether there should be a central treasury center from which all financial decisions and processes are managed, or whether regional treasury centers should (or must) be established so as to take local particularities into account. This decision will have a profound impact on the efficiency and flexibility of financial processes in a global corporate context. At the same time, the principle of segregation of duties must be consistently adhered to across countries so as to maintain the integrity of processes and minimize risks.

Another way to achieve efficiency gains in an international context is to set up shared service centers. They serve as central hubs where trans-regional processes are brought together. Through the use of state-of-the-art technologies, it is possible to provide global services that are particularly beneficial in the treasury area. These shared service centers can be organized either as in-house units or outsourced to external providers. 

Another variant of outsourcing treasury functions is the concept of Treasury as a Service (TaaS). This involves handing over parts of the treasury processes - such as cash and liquidity management, risk and currency management or the execution of financial transactions - to specialized service providers. These service providers deliver end-to-end solutions that let companies benefit from a flexible and scalable infrastructure without having to build up their own extensive resources. TaaS providers can offer expertise and technology solutions for standardized processes for daily operations that are tailor-made to the company's individual requirements. As a result, treasury centers are increasingly able to act as strategic business partners. In turn, they can focus on value-adding activities that create direct surplus benefits for the company instead of limiting themselves to purely technical or administrative processes.

Yet another model that is becoming increasingly important, particularly in the global treasury organization, is treasury support from nearshore or offshore service providers. Nearshoring refers to the relocation of processes to geographically close countries with comparatively lower costs, while offshore solutions entail outsourcing to more distant, and often less expensive, regions.

Both approaches have cost advantages and provide access to specialized experts. Nearshore models come with the added benefit of lower cultural and language barriers and geographical proximity that promotes better collaboration. Offshore solutions, on the other hand, deliver maximum cost efficiency, but are more complex to manage due to factors such as time differences.

It quickly becomes clear when looking at the different forms of organization how many options are available - and with that, how complex the selection process can be. It is especially important to rethink existing structures and examine their benefits in an international context as part of any internationalization efforts. 

Once a company's departmental structure has been established, the next key challenge emerges: business-critical processes need to be overhauled to meet the requirements of international business. This means not only critically scrutinizing the existing process organization in the treasury department, but also significantly adapting it if necessary. This is especially relevant in the course of the internationalization of treasury management, as the company's financial stability depends on the smooth and consistent handling of financial processes worldwide.

The hallmarks of an effective treasury organization are centralized, standardized processes that are supplemented by local structures where necessary to meet specific requirements. In this respect, centralization is key, as the use of best practice processes can increase both efficiency and security. Centralized treasury functions facilitate consistent management and control of global liquidity, risk management and financing.

Yet the decentralized anchoring of certain functions also has an important role to play. Regional treasury managers are often irreplaceable, as they have a better understanding of local market conditions, legal frameworks and the dynamics of local business. Also, they are able to react more quickly to local operational requirements given the time zone differences. By acting as an interface to the operating units and other departments, they help to ensure that local and global treasury objectives are better linked.

Treasury has become unthinkable without technology. Treasury management systems (TMS) play a central role and enable the efficient management and execution of complex financial processes. As such, they should be considered early on in the internationalization process.

Any revision of the treasury IT strategy should take place in parallel with revising the organizational structure and processes, as these areas are closely interrelated. What may seem sensible in isolation may no longer be the optimal solution when viewed in its entirety. As a result, it is important to develop both the structural and procedural requirements for IT together. Among other things, this includes the rollout of central systems in international companies or the establishment of independent technical resources in different countries. In doing so, it should also be examined whether the existing systems are sufficient, may need to be expanded or whether it is necessary to replace them completely.

Building independent structures requires qualified personnel on site who are able to effectively manage and secure the systems. It is also essential to implement suitable support structures. Alongside specialist support, the question arises as to whether technical support should be set up on site, near-shore or off-shore. As each option offers different advantages in terms of cost, quality and availability of specialist staff, companies must weigh up the decision for their specific case.

Beyond this, it is crucial to include both upstream and downstream local systems and applications in the overall strategy. Developing a new authorization concept for local users is another key element. Not only does this concept govern access to the systems, it must also ensure compliance with national data protection regulations.

Regional differences are also particularly important in the area of regulation and governance. This means that reports in foreign trade (AWV) are important not only in Germany, but there are similar reporting requirements in many other countries, e.g. in Austria, France, Japan or India. A similar picture emerges for derivatives trading: There are national counterparts to EMIR worldwide. The Directive on Reporting of Cross-border Tax Arrangements (DAC6) will also play an important role here. Compliance with the DAC6 requires companies to ensure that they report cross-border tax arrangements that meet certain characteristics to the relevant authorities in a timely manner. In addition, local laws and tax issues can significantly restrict the design freedom of a cash pooling arrangement. That is why a comprehensive compliance assessment is essential to meet regulatory requirements and minimize legal risks.

An often-neglected aspect is how to deal with cultural differences in international teams. Left unmanaged, these differences can lead to misunderstandings and inefficient work processes, among other things. Deliberately fostering cultural sensitivity and open communication are therefore essential to optimizing collaboration.

That said, internationalization also offers a valuable opportunity to alleviate the shortage of skilled workers. Broadening the talent pool to a global level allows companies to recruit qualified specialists from different countries. These international employees not only contribute professional expertise, they also bring different perspectives and experiences that contribute to the company's innovative strength and adaptability.

All of this makes it clear that internationalization not only entails numerous challenges for treasury organizations, but also offers tremendous opportunities. Developing a deep understanding of the current international treasury landscape is essential to successfully navigating this change. 

This is where we come in: With our “Global Treasury Survey,” our aim is to find out how treasury departments around the world are organized, what technologies they use, and how they measure performance. Our findings will provide valuable insights into how to optimize treasury strategies and best manage the internationalization process. Your input will allow us to develop practical recommendations in a free whitepaper. The survey should only take 5-8 minutes to complete!

Link to the survey:
Global Treasury (kpmg.de)

Source: KPMG Corporate Treasury News, Edition 148, October 2024
Authors:
Nils Bothe, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Karin Schmidt, Senior Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG